DOJ Sues to Block AT&T Time Warner Merger

November 20, 2017

Today, the Department of Justice sued to block AT&T’s acquisition of Time Warner, Inc (TWI). Spun off in 2009 from Time Warner Cable, TWI is purely a content company, so the “vertical” merger would not directly affect competition in the markets for multichannel video programming distribution (MVPD) television or broadband service. DOJ’s complaint alleges that the combined company would have the ability and incentive to raise the cost of programming for its MVPD rivals, which would both (i) the cost to consumers of those MVPD services and (ii) indirectly reduce MVPD competition and “slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers.”

It’s odd to see the Trump DOJ taking a Carter-era, European-style approach to vertical mergers,” noted Berin Szóka, President of TechFreedom. “This marks the first time that a vertical merger has wound up in court since 1978. The Reagan Administration’s 1984 Non-Horizontal Merger Guidelines set a high bar in blocking vertical deals — and for good reason: because horizontal deals actually eliminate rivals, antitrust review there turns on relatively straightforward weighing of costs and benefits. But in vertical deals, antitrust analysis is far harder: the effect on competition more attenuated, the government’s theories are more conjectural, the defendants’ efficiency arguments are generally stronger, and American courts have been more skeptical that market forces will not be adequate counteract any market power created by the deal. DOJ will have an uphill battle in proving that this deal will really foreclose competition.”

DOJ has reportedly offered to allow the deal to proceed only if AT&T sells off either DirecTV (20.9 million subscribers) or Time Warner’s two marquee content networks: CNN and HBO. Today’s lawsuit follows a speech given on Thursday by Makan Delrahim, whom President Trump recently appointed as Assistant Attorney General for Antitrust. Delrahim announced that DOJ would generally seek to block problematic mergers entirely, or require divestiture of key assets, rather than considering a “behavioral” or “conduct” remedy regarding how the merged company would operate — which, he argued, “set static rules devoid of the dynamic realities of the market.”

“In general, Makan Delrahim is right about conduct remedies: they can be abused as de facto, arbitrary regulation, while also being difficult to enforce,” continued Szóka. “But sometimes, it’s less harmful to let mergers go through with carefully targeted conduct remedies than to block acquisitions entirely. That’s particularly true in tech markets: Big companies always struggle with disruptive innovation — the ‘Innovator’s Dilemma.’ The less clear it is what the market will look like in the future, the more important corporate acquisitions are to acquire new talent, business paradigms and customer relationships. Undoubtedly, part of AT&T’s motivation is that premium video content seems likely to be the killer app that drives consumers to adopt 5G video service.”

We may never know whether the White House pressured DOJ to bring this suit, but the perception of politicization may damage DOJ’s credibility here and in future antitrust suits,” warned Szóka. “Delrahim may simply be acting on his analysis of the facts in this case. But given the President’s regular complaints about CNN and revelations that Jared Kushner pressured Time Warner to fire 20% of CNN’s staff in retaliation for the network’s ‘unfair’ coverage of the Administration, judges will inevitably be more skeptical of the government’s arguments. Whatever the merits of Delrahim’s arguments for preferring structural remedies over conduct remedies, structural remedies will look more politically motivated if they mean selling off politically sensitive media assets like CNN.”

Delrahim’s position will likely become more difficult in future,” concluded Szóka. “Suits against companies like Amazon, Facebook, and Google will all be tainted by the record of Trump’s railing against such companies — especially as those companies become more deeply enmeshed in traditional media. Trump’s ongoing comments about media and tech companies will be even more of a problem in standard antitrust prosecutions, where defendants have far broader Seventh Amendment rights to jury trials than in the context of mergers. And the more outspoken the President is, the harder it will be to find juries without political preconceptions.”

Tech Freedom is a non-profit, non-partisan technology think tank launched in 2011. TechFreedom is excited about the future. Focusing on issues of Internet freedom and technological progress, we work to protect innovation and discovery from powers that fear change. Technology is the great driver of social progress and human well-being, and we aim to keep it that way.